Market capitalization, or market cap, is the total current market value of all outstanding shares of a publicly traded company.
Understanding market capitalization
To calculate market capitalization, you multiply the current market price of a single share by the total number of outstanding shares. Outstanding shares include those held by all shareholders, including restricted shares owned by the company’s officers and insiders. This calculation provides a direct estimate of what a company is worth on the open market.
Financial markets group companies into categories based on their market cap. Large-cap companies generally have a valuation of 10 billion US dollars or more, or the equivalent in local currency. Mid-cap companies fall between 2 billion and 10 billion dollars. Small-cap companies range from 300 million to 2 billion dollars. These thresholds vary depending on the financial institution or regional exchange defining them.
Investors use market capitalization to understand a company’s relative size rather than looking at the share price alone. A company with a stock price of 100 dollars per share is not necessarily larger or more valuable than a company with a stock price of 50 dollars per share. The total number of shares dictates the overall valuation. Evaluating the market cap helps investors compare the scale of different companies across global exchanges.
Market cap reflects the equity value of a company based on public trading. It does not account for the company’s debt or cash reserves. Another metric called enterprise value includes debt and cash to provide a different assessment of a business’s total valuation.
Example
Elephants, imagine you are evaluating two agricultural firms listed on a stock exchange. The first firm, Savannah Trunk Supplies, has 50 million outstanding shares. Each share trades at 10 dollars. The market capitalization for Savannah Trunk Supplies is 500 million dollars, placing it in the small-cap category.
The second firm, Global Tusk Logistics, has a higher share price of 50 dollars. Global Tusk Logistics only has 2 million outstanding shares. Multiplying the share price by the number of shares gives Global Tusk Logistics a market capitalization of 100 million dollars.
Even though Global Tusk Logistics has a much higher price per share, Savannah Trunk Supplies is the larger company by market capitalization. As investing Elephants, you look at the market cap to see the total equity value of the company rather than the individual share price.